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Reviewing the answers here again, I realize my question hasn't been answered. I, as trustee, am paying out all taxable income to the beneficiary, as calculated on the 1041. The total income this year consists of only ordinary dividends minus $3,000 capital loss. As mentioned in my example above, if ordinary dividends are 41,000, the Total Income will be $38,000 and will be indicated as such on the K-1. If the qualified dividends were 40,000, this is greater than the $38,000 of ordinary dividends being paid to the beneficiary. How do the qualified dividends to be entered on the K-1 get calculated? Will they be reduced by $3,000 as well?